The President’s fiscal year 2017 budget proposal includes a cap on tax-deferred retirement account assets of $3.4 million.

Read: Obama seeks to expand 401(k) use by letting employers pool plans

That proposal was first floated in President Obama’s fiscal 2014 budget, and has been advanced in every budget since, gaining little traction in Congress each year.

In this year’s budget, the White House rationalized the proposed cap by arguing that existing deferral limits to defined contribution plans and IRAs do not “adequately limit” the amount of tax-favored savings investors can sock away.

“Such accumulations can be considerably in excess of amounts needed to fund reasonable levels of consumption in retirement and are well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts,” according to in the 2017 budget.

Savers with tax-deferred account assets above the $3.4 million cap—the budget proposes combining assets in individuals’ DC, DB , and IRA accounts to determine if they reach the limit—are adding to the country’s deficit, implies the proposal.

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By capping savings, the tax system would be made more progressive, “and still provide substantial tax incentives for reasonable levels of retirement saving,” says the White House’s proposal.

How likely is it that Congress will sign off on account caps? Not very, if previous attempts at caps are any indication.

Still, the proposal begs the question as to how many Americans would be impacted.

In 2013, on the heels of the cap’s first appearance in a budget proposal, Jack VanDerhei, director of research at the Employee Benefits Research Institute, set out to answer that question.

As in this year’s budget, that proposal capped aggregated accounts at $3.4 million, a rate pegged to the annual annuity limit on tax-qualified defined benefit distributions (it was $205,000 in 2013, and is now $210,000).

VanDerhei and EBRI’s analysis in 2013 showed a minuscule percentage of participants in 401(k) plans had combined account balances rich enough to be immediately affected by a $3.4 million cap.

But when accounting for fluctuating discount rates, which determine the defined benefit annuity caps, and considering the age of savers, VanDerhei’s analysis showed that the effects of a cap would ultimately be significant.

At a historically low discount rate of 4 percent, more than one in 10 401(k) participants would likely hit the proposed cap before retirement age—and that’s not accounting for any defined benefit savings participants may have.

But in the event that discount rates revert to historically normal levels, the actuarial effect would be to lower the cap level, exposing far more savers to its limits.

At an effective interest rate of 6 percent, the cap limit drops to $2.7 million, and at 8 percent, it drops to $2.3 million, according to VanDerhei’s analysis (it can be found here).

Should interest rates return to 8 percent, somewhere between 20 and 30 percent of 401(k) participants would be expected to be impacted by the cap.

The 2017 budget proposal says the maximum account level would be adjusted for inflation increases, but it makes no mention rising interest rates’ affect on cap levels.

This year’s proposal does address the impact of a savings cap on sponsors’ annual reporting requirements, suggesting, “simplifications would be considered in order to ease administration.”

In VanDerhei’s analysis, a cap could create a savings culture where participants and sponsors are routinely required to suspend deferrals.

That could negatively impact younger participants’ saving habits, and potentially create more regulatory roadblocks for smaller employers, according to VanDerhei’s analysis.

Mike McNamee, chief public communications officer at the Investment Company Institute, fears a cap would have unintended consequences on both participants and sponsors.

“This approach is overly complicated and extremely difficult for businesses and families to track,” said McNamee in an email.

“Under this proposal, fluctuating interest rates or market returns could temporarily push an individual’s total accumulations over the limit in a given year—forcing the saver to stop saving for some time and restart later,” he added.

That type of “stop and go” retirement system would penalize workers that have taken the responsibility to save over the long term, said McNamee.

Instant Insights /

401(k) savings caps could affect millions of participants

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